Onaolapo: Monetary Policy Alone Can’t Fix Economy

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The Chief Executive Officer, Eczellon Capital, Mr. Diekola Onaolapo, in this interview speaks on state of economy. Nume Ekeghe presents the excerpts:

What are your thoughts about the state of the Nigerian economy as economic growth has remained weak?

The Nigerian economy has been on a gradual recovery and growth trajectory after it exited recession. The growth is still weak. The general macro environment is relatively positive, with inflation on an eighteenth consecutive month-on-month decline – and currently at 11.14 per cent; relatively stable foreign exchange (FX) and converging FX markets. Even the Purchasing Managers’ Index (PMI) is back in the green at 51 per cent. Generally, the outlook is positive. The positive activities in the global commodities market as crude oil price has been on a positive momentum, presently hovering over $70 per barrel and expected to hold, with current circumstances of global tension and extension of production cut period by OPEC and Russia.

This has helped the accretion of Nigeria’s reserves – currently above $46 billion – and by extension, boost in the country’s capacity to fund external trade and maintain price stability. Also, policies of the economic management team in recent periods have helped – the Naira/Yuan swap deal will further support the naira against the dollar; and also, monetary policies have been proactive in face of global economic headwinds that may cause shocks to the local Nigerian economy. Given the supportive macro-economic fundamentals and the medium-term economic plans of the government in its Economic Recovery and Growth Plan, we foresee the economy trending along its growth path despite the short-term negative effects of the political activities on the nation’s financial markets.

You mentioned monetary policies, what are your thoughts on interest rate in the country compared to other frontier and emerging economies? Is the MPR rate at 14 per cent the best for the economy at the moment?

With the external stimuli from global developments, such as a strong US economy, strong dollar and rate increase by the US Fed and Bank of England, the domestic interest rate (MPR), which has been held steady for two years at 14 per cent, can be said to be in a right position now. Although it will not be surprising if it is increased in the near term. In order to deal with the global headwinds as mentioned earlier, other emerging markets have increased their respective benchmark interest rates, owing to the negative effects of capital reversals from their markets, falling local currencies, with unwanted effects on prices and their real sector.

Interest rate in Turkey was recently increased by 125 basis points to 17.75 per cent in June; Argentina increased rates from 40 per cent to 45 per cent; Indonesia increased its benchmark interest rate by 25 basis points, from 5.25 per cent, to 5.5 per cent, although South Africa and Brazil have held rate at 6.5 per cent and Mexico is 7.5 per cent. Some analysts opine that the MPR should be reduced to further facilitate growth by providing liquidity to the real sector.

This is a straight-line analysis which, albeit not wrong, doesn’t consider other pressure factors on the economy. As mentioned earlier, developments in the global markets have put pressure on emerging markets with capital reversals. This has affected Nigeria also. Sustained capital outflows will put pressure on FX and threaten prices. As we have seen, the rate of decline of inflation has almost gone flat. Also, with the country in election season and the typical impact on inflation, a reduction in MPR will increase liquidity that will further exacerbate the issue.

This is why the CBN’s recent policy, of using unconventional and quite innovative measures to inject liquidity to the real sector, is laudable. It allows the MPC the flexibility to increase the MPR, in the second-half of the year if inflationary pressure heightens, and at the same time provide needed support to the real sector.

Speaking on the CBN policy, what are your thoughts on the long-term single digit loans to the real sector that was unveiled recently?

The policy is very creative and should be applauded. The CBN, and its monetary policy making arms has a narrow vista to navigate given current circumstances and pressures that may impact the Nigerian economy and the approach may achieve two ends of supporting real sector and mitigating inflationary pressure. The policy is encouraging banks to lend to the agriculture and manufacturing sector at a single-digit interest rate of nine per cent and for a period of seven seven years, for which the CBN will release the corresponding amount from a bank’s Cash Reserve Ratio to the amount lent to these sectors.

It is a good response to the clamour for a reduction in the benchmark interest rates by the real sector as it has been held at 14 per cent since July 2016. The policy is novel as it will enable the advancement of credit facilities to the real sector at low interest rates and for a long-term which will ideally enable manufacturers to plan, increase production, create jobs and improve their contribution to the Gross Domestic Product. The above, notwithstanding, it is worthy of note that the policy technically undermines the purpose of the Cash Reserve Ratio which is to serve as a liquidity buffer to the banking system in the event of a systemic shock. Hence, the CBN should do well to ensure that the banks are not overly exposed to systemic shocks by preventing a significant depletion of their CRR.

Furthermore, the success of this policy will be dependent on the bankability of the projects which requires bank financing. The roles of financial advisers and investment bankers will be very key here and banks should encourage their borrowing customers to seek professional assistance.

Above all, as laudable as these policies are, the use of monetary policy alone to fix economic issues may be inefficient in the long run. Fiscal policies are important to the achievement of sustainable development and growth of the economy. The CBN needs to work with the Ministry of Finance and Ministry of Trade and Industry to ensure all policies are in tandem and congruent towards a common objective.

For instance, one wonders: as the CBN seeks to aid local production by supporting local manufacturing, the country is currently at crossroads between signing the AfCFTA agreement that opens its market. Do these policies work together or against one another? These are key areas that require key answers

Speaking about the AfCFTA, some of the economic groups in the real sector – especially the MAN are against its signing.
For a pro-Africa investment bank like Eczellon, what is your thought on that?

The AfCFTA is a positive initiative, but its touted benefits are more futurist and long-term vision, and not necessarily dealing with current issues that may prevent that long-term vision. Therefore, to say arguments ‘against’ the agreement or against any member joining at this time are anti-Africa may be incorrect, given the current dynamics of the African continent. Perhaps – one may argue – that the ‘against’ position is the more pro-Africa line of thinking, in the present circumstances.

The AfCFTA – a project driven by the AU – is ultimately aimed at unifying the African continent into a single large market, through elimination of tariffs on intra-Africa trade of goods and services, with free movement of business people and investments. The initiative, at best presently, is like putting the cart before the horse. Africa is not that economically integrated before we try to integrate its markets. For instance, a policy for free movement of people does not automatically mean people will move freely. Even with visa requirements for entry and settlements, you still hear of xenophobic attacks on people of different African nationality in another African country. The local issues that cause things like these have not necessarily been fixed.

For free movement of goods, the question is what goods? Is it foreign goods merely assembled here or truly made in Africa goods? For an African country that has plans to grow local production – which we believe is the focus of most African countries at the moment – a fully open and free market will not serve that purpose in the near term. Not that protectionism alone will bring any good as it were, but before an agreement that unifies the market, perhaps it will serve for African nations to harmonise their respective economic growth and development agenda. When respective economic agendas of component countries are woven into this theme, then a continental free market may serve.

We are seeing renewed interest in the debt market, especially the issuance of Commercials Papers, what do you think is aiding this trend?
Renewed interest in the debt market can be largely attributed to the reduced cost of funds in the domestic debt capital market, largely a result of the 2017 debt restructuring strategy of the federal government which led to the liquidation of a significant portion of FGN’s domestic borrowing. The resultant crash in yields on debt instruments has made debt capital more attractive to corporates, hence the increased interest in and the issuance of debt instruments.

Commercial papers are especially favoured at the moment because of investors’ perceived uncertainties in the long-term economic outlook, therefore their preference for short-term debt instruments – the commercial papers. In addition, the bearish sentiments in the equities market have led to the underpricing of major stocks. It is presently disadvantageous to companies to raise equity capital. Consequently, corporates are approaching the debt capital market to meet their financing needs at cheaper rates. With the recent disclosure by the CBN to buy Commercial Paper notes from large corporates at a single digit interest rate and for a period of seven years with the utilisation of proceeds for specific projects, the issuance of Commercial Paper notes is expected to increase in the near-term

Speaking about the equities market, how soon do you foresee a turnaround?

It is not unusual for foreign investors to seek relatively safer havens for their investments during Nigeria’s election season. The current capital reversal is not unconnected to the political uncertainties in the country as the market prepares for the 2019 general elections. With a 38 per cent decline in foreign portfolio investment transactions in the equities market, the negative impact on the market is the immediate consequence, with a year-to-date decline of 8.5 per cent as of (August 17, 2018). With a generally stabilising economy and strong fundamentals, we expect the reversal in the bearish market trend after the February 2019 general elections, especially when a new cabinet is formed.

Do the political tensions in the country worry foreign investors who participate in the deals you structure?
Political tensions would typically negatively influence foreign investors’ interest in the market particularly foreign investors that are not conversant with the Nigerian markets. Those who have experience in Nigeria and who have long term views remain keen, because the country has such strong fundamentals beyond its short-term worries. Also, deal structures are key. Investors will commit to deal and project structures that attend to their risk concerns and provide returns that are attractive-enough. If you look at one of our recent projects, in which we raised N28 billion ($92million) in the first tranche of a N50 billion programme for a PPP project. Investors, which included both local and foreign investors, embraced the instrument issued largely because of the structure at the time.

On your website, you stated that you have raised over $1.34 billion in capital, can you tell us about the deals/projects?

Our website says transactions value and capital raised. We also engage in Mergers and Acquisitions; Capital / Debt Restructuring; Concessions; Public sector advisory; Project Development et cetera, in addition to capital raise. In recent times, we have advised on a $270 million debt restructuring / refinancing in the oil and gas industry; we led on a N50billion ($163million) debt capital market issue for a PPP project, for which N28billion ($92million) was raised in the first tranche; we were lead advisors to a state government in Nigeria on the restructuring of their bond issue; we led a major real estate development project in Kenya, we were on an affordable housing project in Senegal.

About our deals and project, our deals are basically to help leaders in government and corporate private sector to generate idea and provide the financing means to implement them. We are particularly interested in projects and deals of impact and value and that somehow shift the African story positively forward.

Well, every deal has been fulfilling. No deal is like the other, however all our engagements are based on a deep level commitment to our founding purpose, our mission and values. Our purpose is to aid the manifestation of the African potential and our mission is to use finance expertise to facilitate the same. So, which would one consider most fulfilling of our deals? Is it the award winning debt capital issue that raised N28billion ($92million) for a PPP project, to finance the deployment of a solution to a state’s long standing problem of waste management, pollution and environment hazard? With our help, our client established a programme which will clean the State and – while at it – created 27,500 jobs. Is it our work on the restructuring of debt for an oil company which was struggling under its debt burden, but has now returned to growth? Is it a state government that we helped restructure their debt obligations, which helped them free cashflow and liquidity to avoid a government shut down and the resultant loss of civil service jobs and inability to impact their people? We worked on the turnaround of one of the biggest automotive manufacturing plants in the West African region and also on the set up of a new one. In addition, we assisted on the establishment of an automotive training facility that ties into skills acquisition and industrial growth. We have been involved in raising capital for companies in agriculture – production and food processing, helping to expand their operations through vertical integration and recapitalisation.

We advised and provided financing for the setup of one of the fast-growing healthcare enterprises in Nigeria. Our engagements all have this deep level satisfaction because they all fit our purpose, our mission and our core values.

Are there any final words for your stakeholders?
Our stakeholder universe is large. Our stakeholders include leaders in government who require ideas for developmental initiatives and means (funding) to implement them. Our stakeholders include leaders of large corporate institutions who need solutions in financing and business strategy to grow their businesses. Our stakeholders include the regulators – of our business and of spaces in which we do business. Our stakeholders include investors – local and foreign – looking for opportunities. Our stakeholders also include the communities in which we do business and talented workforce who wish to forge a career in our field. For all our stakeholders, we will strive to be a sustainable professional service and business enterprise, continuously delivering value to stakeholders, maintain focus on our core expertise to deliver solutions and establish pedigree of performance on our client engagements for which we maintain passionate focus on landmark initiatives and projects that shift the African story positively forward. While at it, we will be a socially and environmentally responsible firm committed to the sustenance of our communities and the planet and we will continuously evolve with the times, while maintaining consistent commitment to our values.

What should we expect from your firm in the future?
In the near future, we will continue to consolidate our presence in our markets and maintain our pan-Africa growth plan. We have been involved in transactions in select markets of Kenya, Uganda, Cameroun, Nigeria, Ghana, Liberia and Senegal. Our aim, in the near term is to increase our coverage of African markets beyond our current locations.

Even with its diverse countries, people, languages and markets, most of the African continent has similar issues, which our expertise can help solve. African governments will have to deliver true development to their respective peoples and they need ideas and the means to do that. African businesses need professional assistance that help them grow and be sustainable in the production of solutions to African issues. We find our firm in the core of the above and we remain committed to the cause.